Grid old days in past, power expert warns

Thursday

Sep 23, 2010 at 12:01 AM

You may not recognize your electric utility a decade from now, according to an expert on the economics of the nation's electricity industry who spoke Wednesday to California Public Utility Commission staff in San Francisco.

Dana M. Nichols

You may not recognize your electric utility a decade from now, according to an expert on the economics of the nation's electricity industry who spoke Wednesday to California Public Utility Commission staff in San Francisco.

Instead of a traditional company that bills you every month for electrons, utilities may morph into customer service-heavy entities that instead charge you based on services such as how much heat or light you use. And those same businesses may also be helping you to invest in home monitoring equipment, insulation, tighter windows or other improvements that will cut your energy use, said Peter Fox-Penner, a consulting executive with The Brattle Group.

Fox-Penner is the author of "Smart Power: Climate Change, the Smart Grid, and the future of Electric Utilities," a book published this year. In Wednesday's speech and in the book, Fox-Penner said economic and political pressures will force utilities to make radical changes if they are to survive.

In particular, the strategies that built U.S. electrical utilities over the past 130 years will no longer work, because circumstances have changed, he said. During much of that history, utilities were focused on expanding production and distribution, lowering prices and profiting by selling ever larger quantities of electricity.

By contrast, Fox-Penner said, in 20 to 40 years the amount of electricity produced and sold in the United States likely will be flat or possibly decline, and the cost to produce it will increase because of rising commodity costs and the costs of switching to noncarbon-emitting generation methods.

That puts a huge burden on policymakers and regulators to create a framework where utilities can profit from helping customers conserve. In traditional business models, helping customers conserve doesn't work because conservation measures mean lower sales, which is contrary to a company's interests.

Fox-Penner said California has been a leader in creating incentives to generate more electricity from sources that don't put carbon in the atmosphere and that make it profitable for utilities to help their customers conserve.

In California, utilities get to keep as profit about 12 percent of the value of the energy they help customers save. In 2008, Pacific Gas and Electric Co. earned about $41.9 million that way, he wrote in his book.

At the same time that utilities are under pressure to switch to green fuels and encourage conservation, a wave of technology is creating what industry experts call the "smart grid."

At the residential customer level, that means some people can read a computer screen to see how much electricity various devices in their homes are using. When that is combined with information on variable rates - where utilities charge more for more expensive power during peak demand hours - then customers can decide when it is worth the cost to switch on an air conditioner, oven or computer.

Fox-Penner said that research shows customers respond to such information by shifting their energy demand, thus reducing the need for construction of expensive peaker plants.

At the same time, technological and political changes are making it more viable for small and midsize electricity generators to enter the market. That includes everyone from a home-owner who puts solar-electric panels on the roof to something like the Buena Vista Biomass Power project, an 18-megawatt generation plant near Ione that is expected to begin operation next year. The project is converting a former coal-powered plant to burn wood chips culled from orchards, forest slash piles and urban waste. That plant is owned by private investors but depends on incentives created by California law.

The possibility for efficient smaller-scale generation and the imperative to increase investment in efficiency contributes to another possible change: More local governments may enter the electricity generation and sales business to promote the stability and prosperity of businesses and residents.

"This is really an extraordinary moment of opportunity for community scale or municipal generators owned by government," Fox-Penner said. He said this could be "an era of renaissance for public power. Maybe that will happen."

In California, large utilities and local governments already are brawling over that possibility. In June, California voters defeated Proposition 16, which was backed by PG&E and other large utilities. That measure would have made public utility formation more difficult by requiring a two-thirds vote of the electorate for any local government seeking to form one.

Officials in Lodi and other communities with city-owned utilities opposed Proposition 16.